Government’s “Fairyland” Damages Theory Rejected Under the False Claims Act
The United States Court of Appeals for the Sixth Circuit recently overturned an unreasonably high damages award under the False Claims Act (“FCA”), rejecting the government’s theory that “actual damages” under the FCA equal the entire amount the government paid for a good or service. See United States ex rel. Wall v. Circle C Constr., No. 14-6150 (6th Cir. Feb. 4, 2016). Instead, the Court held that actual damages are the difference in value between what the government bargained for and what it received.
Defendant, Circle C, contracted with the Army to build several dozen warehouses at an Army base. Pursuant to the contract, Circle C and its subcontractors were required to pay their employees above-market wages in accordance with the Davis-Bacon Act. The contract also required Circle C to submit weekly compliance statements certifying that Circle C and it subcontractors paid its employees the required wages. Contrary to its weekly compliance statements, Circle C’s subcontractor for electrical work underpaid its electricians a total of $9,916 (the electricians received $16 per hour instead of $19), but the Government paid Circle C at the $19 rate. This underpayment rendered false a number of the compliance statements, and made Circle C liable to the government under the FCA. The district court determined that the government’s damages were $259,298.18, the entire amount the government paid for the electrical work. When trebled, the FCA award exceeded $750,000.
On appeal, the government defended its damages theory by first arguing that all of the electrical work in the warehouses was “valueless” because the work was tainted by the $9,916 underpayment to the electricians. The Sixth Circuit, however, found this argument unconvincing. “Actual damages are the difference in value between what the government bargained for and what the government received.” The Court explained that the government’s damages “claim is belied by the government’s own conduct in using the buildings.” Here, money damages provide the appropriate remedy where the government bargained for the buildings and the Davis-Bacon Act wages and “got the buildings but not quite all the wages.”
The Sixth Circuit distinguished this case from other scenarios where only the entire amount paid for the goods under the contract could remedy the breach. The Court, by way of example, referenced two FCA actions where the goods delivered were worthless because they were dangerous to use. The Court also offered examples of “unalterable moral taint”, such as uniforms manufactured by child laborers in Indonesia and silicon chips shipped from Iran. The Court reasoned that, unlike this case, no award of money damages other than the entire amount paid for the goods in each of these examples could remedy the breach.
The government also argued that it should pay nothing for the electrical work because it would have suspended its payments had it known that the electricians were being underpaid. The Court found this argument unavailing and held that in determining actual damages “the relevant question is not whether in some hypothetical scenario the government would have withheld payment, but rather, more prosaically, whether the government in fact got less value than it bargained for.” The Court found that the government had received almost all of the value that it bargained for with respect to the electrical work.
In its conclusion, the Sixth Circuit strongly rebuked the government’s theory: “Actual damages by definition are damages grounded in reality. And in the real world the government could not forever withhold all payments to a contractor for work on several dozen warehouses, and yet have the work continue to completion and the government continue to use the warehouses to this day. The damages the government seeks to recover here are fairyland rather than actual.” The Court ruled that the award of damages by the district court in this case was an abuse of discretion, and held that the government’s actual damages were $9,916. This amount trebled is $29,748, far less than the initial award of over $750,000.